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First Assignment
Chapter 1 - The Fundamentals of Economics Question 1: Explain how the cool head might provide the essential positive economic analysis to implement the normative value judgements of the warm heart. Do you agree with Marshall's view of the role of the teacher? Do you accept his challenge? Cool heads are always necessary in the decision making process to achieve the best output for a society. Achieving the best output means optimizing resources, generating employment, increasing income, seeking economic progress and in consequence reducing misery, disease and hunger. Cool heads should always be objective, balance the pros and cons and take the difficult decisions that will benefit a majority. Cool heads involve leveraging our knowledge and analytical ability to achieve the greater goal which is to improve the lives of individuals in our society. In our study group's point of view the role of the teacher shouldn’t be limited to transfering objective knowledge to students, but should also foster the intellectual curiosity and social responsibility. We agree with Marshall when he proposes that teachers should have high ambitious to touch students' hearts so they can be better citizens. We fully accept the challenge with cool heads and warm hearts. Question 7: Some scientists believe that we are rapidly depleating our natural resources. Assume that there are only two inputs (labor and natural resources) producing two goods (concerts and gasoline) with no improvement in society's technology over time. Show what would happen to the PPF over time as natural resources are exhausted. How would invention and technological improvement modify your answer? On the basis of this example, explain why it is said that "economic growth is a race between depletion and invention." As natural resources are exhausted we can expect we will have less concerts and gasoline over time. As concerts depend much more on labor, the reduction of concerts will be lower than gasoline, which depends more on natural resources. This can be seen by the graph below with the new PPF moving to the left (A to A’). (Illustration) With the presence of invention and technological improvement over the time the PPF curve would go to the right, increasing income (A to A’). (Illustration) “Economic growth is a race between depletion and invention” because if you don’t have technological improvements through invention, natural resources will be exhausted and depleted. So if you don’t run with invention, depletion will win. Chapter 2 - Markets and Governments in a Modern Economy Question 1: What determines the composition of national output? In some cases we say that there is "consumer sovereignty," meaning that consumers decide how to spend their incomes on the basis of their tastes and market prices. In other cases, decisions are made by political choices of legislatures. Consider the following examples: transportation, education, police, energy efficiency of appliances, health-care coverage, television advertising. For each, describe whether the allocation is by consumer sovereignty or by political desicion. Would you change the method of allocation for any of these goods? In modern economies, governments tend to intervene in order to increase efficiency, promote equity and foster macroeconomic stability and growth. The examples mentioned in this question (transportation, education, police, energy efficiency of appliances, health-care coverage) all have in some way government intervention. On the other hand, television advertising is a good example of consumer sovereignty. Education and health-care are always provided by government. However, the quality of the services is not optimum most of the time. In some countries with lack of a good education and health care coverage provided by governments, the presence of private companies offering these services is huge and totally controlled by consumer preferences. Consumers choose their preferred school or hospital, for example. Police, which is a public good, is also provided by the government in order to control public security, and consumers have no option to choose. Transportation and energy efficiency are, for example, completely regulated by the government in order to increase efficiency by promoting competition and curbing externalities like pollution. In both cases consumers have low influence in the decision-making process. Television advertising is an example of allocation by the consumer sovereignty. Private companies have the objective of influencing and gathering the greatest number of consumers by meeting consumers' needs through their tastes and preferences. An exception where government can play an important role in television advertising can be a Socialist Government, which plays an interventionist role by filtering what is allowed to become public by private sectors. Consumer sovereignty generates competition which increases innovation and the quality of goods and services. On the other hand, government interventions generate stability, equity and efficiency. We believe that for each case we should check what we need to improve: stability/ equity/efficiency or quality/innovation? Depending on the answer we will know if we should change the method of allocation of these goods. Question 3: This chapter discusses many "market failures," areas in which the invisible hand guides the economy poolry, and describes the role of government. Is it possible that there are, as well, "government failures," government attepts to curb market failures that are worse than the original market failures? Think of some examples of government failures. Give some examples in which government failures are so bad that it is better to live with the market failures than to try to correct them. It is definitely possible to have government failures worse than the original market failure. Below we mention a few examples: - Brazilian "Bolsa Família”: This government program was created to mitigate a failure in inequalities of income and wealth in the Northeast of Brazil. This “assistencialist” program can be considered a government failure because instead of redistributing income, it disencouraged a culture of work. - After economic recessions such as in 1930 in the USA and in the 1990’s in Mexico, the government decided to implement extra internal taxes with the purpose of reducing the debts. At the end of the day, it caused a decrease from external investment once it increased the internal economic risk. - In some Latin America countries the government established that some Public Universities should have a certain quota for minorities, since the average number of them in these institutions was extremely low. As the competition for being accepted in these Universities is very high, this situation caused an increase in race discrimination among students, and eventually the minorities, who in theory were the beneficiaries of these programs, turned against these government resolutions. Chapter 3 - Basic Elements of Supply and Demand Question 3: Explain why the price in competitive markets settles down at the equilibrium intersection of supply and demand. Explain what happens if the market price starts out too high or too low. When we find a competitive market with the sufficient amount of goods or services provided at a satisfactory price for the consumers, we found neither surplus nor shortage. This means that the amount supplied is equal to the amount demanded within the markets; no price tends to fall or go up. If the price starts too high, suppliers will want to sell more than what consumers are demanding at that price, so stocks will rise eventually forcing the price to go down. On the other hand, if prices start in a low range, the demand will be higher, and the supply will not suffice, ergo prices will tend to rise as many consumers compete for very few items in stock. Question 7. Examine the graph for the price of gasoline in figure 3-1, page 46. Then, using a supply-and-demand diagram, illustrate the impact of each of the following on price and quantity demanded: a. Improvements in transportation lower the costs of importing oil into the United States in the 1960s. (Diagram) Here supply prices fall increasing the quantity supplied. b. After the 1973 war, oil producers cut oil production sharply. (Diagram) This on the other hand, will cause an increase in price, causing less quantity consumed. c. After 1980, smaller automobiles get more miles per gallon. (Diagram) In this case, the demand quantity will decrease, making the price decrease as well. d. A record-braking cold winter in 1995-1996 unexpectedly raises the demand for heating oil. (Diagram) In this graph however, there is an increase in the demand, causing higher prices. e. A global economic recovery in 1999-2000 leads to a sharp upturn in oil prices. Chapter 4: Applications of Supply and Demand Question 4: Consider a competitive market for apartments. What would be the effect on equilibrium output and price after the following changes (other things held equal)? In each case explain your answer using supply and demand. a. A rise in the income of consumer: The demand curve will shift to the right setting a new equilibrium point with a higher price and quantity demanded. b. A $10-per-month tax on apartment rentals: The supply curve will move up causing a new equilibrium point with a higher price and lower quantity supplied. c. A government edict saying apartments cannot rent for more than $200 per month: This measure will cause a missmatch between quantities supplied and demanded. The demand will rise significantly so many consumers won’t be able to rent an apartment because the demand will exceed the supply. In other words there will be a deficiency of supply at ceiling price which will cause a shortage of apartments. d. A new construction technique allowing apartments to be build at half the cost: The total cost for building apartments will be lower, so the supply curve will shift to the right as builders are willing to offer more apartments at the same price, setting a new equilibrium point with a lower price and more apartments supplied and demanded. Chapter 5 (p.100) Question 2: Each week, Tom Wu buys two hamburgers at $2 each, eight cokes at $0.50 each, and eight slices of Pizza at $1 each, but he buys no hot-dogs at $1.50 each. What can you deduce about Tom’s marginal utility for each of the four goods? Tom’s marginal utility is a function of the need or preference he has for the items as well as the price he must pay for each. We know how much money he is willing to spend on food and drink, and we know how he allocates this money. We assume that by the choices he makes, he is maximizing his utility from his purchases. The food items (hamburgers, pizza-slices, and hot-dogs) are substitute goods, and the drink item (coke) is as complementary good. Hamburgers: A third hamburger would provide Tom with less utility than any of the other items he buys. That is why he stops at two hamburgers. He values hamburgers, but at the current price he is willing to buy only two. Pizza: The eight slice of pizza provides Tom with the least utility he is willing to accept for any food item. He buys more slices of pizza and spends more money on them than on hamburgers. This may be due because he enjoys pizza more than hamburgers, or maybe buying more pizza (which is cheaper than hamburgers) allows him a greater utility for the entire week. Hot-Dog: It is clear that Tom is not willing to buy any hot-dogs at the given price. A first hot-dog would provide Tom with less utility than his second hamburger or his eight pizza-slice and he chooses accordingly. Perhaps he would buy hot-dogs if their price was lower, or maybe he simply does not like hot-dogs regardless of price. His final decision is to buy none. Coke: Drink is a complementary good for the food items. No alternatives to coke are mentioned, so we can assume that cokes provide Tom with more utility than any other drinks available at any price. Tom spends his money according to his assessment (conscious or not) of how much drink he is willing to consume relative to the food items he purchases. The utility for Tom’s purchases is best seen in the context of his total purchases. We can only deduce the value of each product as it is being tested against the value of its complementary or substitute goods.